American retail banking: The road to agnosticism

IS THE future of banking in the branch or in the ether? Two big acquisitions in America point in opposite directions yet both deals make sense. That’s because the industry’s future lies in multiple distribution channels, not just one.

Capital One, a card issuer that has pushed aggressively into banking, is paying $9 billion for ING Direct, America’s largest stand-alone internet bank. Pittsburgh-based PNC has forked out $3.5 billion for Royal Bank of Canada’s network of branches in six southeastern states. The first deal was forced: ING Direct had to be divested under the terms of its Dutch parent’s bail-out. The second was another case of a foreign bank throwing in the towel after failing to crack America’s retail market. In a further example, HSBC’s credit-card business is for sale.

After several false dawns, online banking has grown steadily if modestly over the past five years. Internet banks now hold 7% of total deposits in so-called money-market accounts, the segment in which they compete hardest (in contrast to basic current accounts and certificates of deposit). Almost half of all American households now do some banking online. Some 10-15% do their banking on mobile devices, a number that is growing rapidly.

When interest rates are low, as they are today, the appeal for banks of online deposits grows relative to those harvested in the branch, points out Aaron Fine of Oliver Wyman, a consultancy. The reason is that traditional banks hold a lot more non-interest-bearing and low-interest deposits than direct banks typically do, and the profitmaking opportunities from reinvesting these in wholesale markets shrinks dramatically as rates fall. Indeed, most retail banks will suffer more from this lost “carry” than from more-publicised regulatory curbs on overdraft and card fees. ING Direct’s all-in costs per dollar of deposits are now slightly below those of the typical large bank—though they would jump back above if interest rates rose substantially. Online banking is “an implicit bet that rates won’t rise too far,” says one banker.

It helps internet banks that savers are growing more comfortable with the technology. This has helped drive down to almost nothing the premium these banks must pay for deposits over the rates offered by offline rivals, says Sherief Meleis of Novantas, another consultancy.

Even so, the stand-alone online model has weaknesses. ING Direct has struggled to match its deposit-gathering prowess in lending, and has more money than the typical bank parked in low-yielding securities. Capital One likes to think it can do better with these assets.

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IS THE future of banking in the branch or in the ether? Two big acquisitions in America point in opposite directions yet both deals make sense. That’s because the industry’s future lies in multiple distribution channels, not just one.

Capital One, a card issuer that has pushed aggressively into banking, is paying $9 billion for ING Direct, America’s largest stand-alone internet bank. Pittsburgh-based PNC has forked out $3.5 billion for Royal Bank of Canada’s network of branches in six southeastern states. The first deal was forced: ING Direct had to be divested under the terms of its Dutch parent’s bail-out. The second was another case of a foreign bank throwing in the towel after failing to crack America’s retail market. In a further example, HSBC’s credit-card business is for sale.

After several false dawns, online banking has grown steadily if modestly over the past five years. Internet banks now hold 7% of total deposits in so-called money-market accounts, the segment in which they compete hardest (in contrast to basic current accounts and certificates of deposit). Almost half of all American households now do some banking online. Some 10-15% do their banking on mobile devices, a number that is growing rapidly.

When interest rates are low, as they are today, the appeal for banks of online deposits grows relative to those harvested in the branch, points out Aaron Fine of Oliver Wyman, a consultancy. The reason is that traditional banks hold a lot more non-interest-bearing and low-interest deposits than direct banks typically do, and the profitmaking opportunities from reinvesting these in wholesale markets shrinks dramatically as rates fall. Indeed, most retail banks will suffer more from this lost “carry” than from more-publicised regulatory curbs on overdraft and card fees. ING Direct’s all-in costs per dollar of deposits are now slightly below those of the typical large bank”though they would jump back above if interest rates rose substantially. Online banking is “an implicit bet that rates won’t rise too far,” says one banker.

It helps internet banks that savers are growing more comfortable with the technology. This has helped drive down to almost nothing the premium these banks must pay for deposits over the rates offered by offline rivals, says Sherief Meleis of Novantas, another consultancy.

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